Postponing Isn’t Solving

The problem is flood insurance, specifically the price of it. The federal government has been subsidizing the insurance for years and the problem with that is that there is a reported $28 billion debt in the fund caused by such disasters as Katrina and it does not take into consideration the effects of hurricane Sandy.

So, in a bi-partisan effort to plug the drain, Congress passed the bi-partisan Waters-Biggert Act that raised premium rates 20 per cent a year until the subsidies were gone. Problem: unintended consequences. Many can’t pay the projected increases even though many are required to have insurance either by law or through their mortgages. The consequences of that is that many can’t sell their homes either. And, it doesn’t affect just those rich people right on the water. It’s much broader than that and the squawking consequently was much wider.

Interestingly, for Floridians it has been a double whammy. Floridians paid in as much as four times as they have had claims because most of Florida storm damage comes from wind, not water. That could change, of course, but that’s not the issue now. So, we’re subsidizing everyone else. The solution has been another bipartisan bill to postpone the increases for four years while coming up with a long term plan. Nothing is definite yet. As I wrote: ” Postponing is not solving”.

In the meantime, trying to sell still might be difficult because a buyer still could face extraordinarily high insurance rates, at least if they bought through the federal program. A few private insurance companies are considering introducing more affordable policies. Of course, they many not be affordable if you’ve been flooded out numerous times which is not an unusual occurrence in low lying undrainable areas. At any rate, the private market hasn’t developed yet.

The probable effects are both predictable and unpredictable. People might lose their homes if they can’t pay the insurance and can’t meet the requirements of the mortgages. Banks get hurt as well as the people. Home values plummet. Local taxes, based upon home values, drop accordingly. Development stops, homes are abandoned and so forth. Eventually, if the property is desirable it is acquired by people without mortgages who take the chance on flooding. In another unintended consequence, as people drop insurance, the fund debt for the subsidized insurance actually increases.

On a positive note, it is possible that private insurances will step into the market, but on the other side of the ledger, that leaves the federal government with only the “bad” properties – if they insure them at all. Or, the state can take over as suggested by the Tampa Bay Times. After all, we pay in more than we get back. Maybe, but if that is the long term case, the private companies will compete better. Besides, didn’t self-insuring for wind end up in a solution/problem situation?

Cause of all this distress is the subsidy. It is axiomatic that once a subsidy is started it is extraordinarily difficult to remove. Once given it is hard to get back or take away. In fact, the subsidies were provided so that development could take place, or so that residents along low lying areas of streams and rivers or seaside wouldn’t have to move. These subsidies weren’t just political moves for votes, but to stimulate development so that government has adequate funds. In theory, development on barrier islands wherever they are, shouldn’t be permitted. Notice that we’re pumping in sand in many barrier areas. That’s a subsidy, too.

Originally, in a prior column, I opined that maybe we needed a bigger pool. I was wrong. We do have a bigger pool it’s just that other areas get more benefit than we do, at least collectively. What we’re left with is more than an economic or political issue, but with a philosophical one: if the private markets find the risks unacceptable (in other words, they are likely to lose money), how much are we going to subsidize and who are we going to subsidize? Then the only question is who do we tax to get the money?

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